The Investor's Lexicon

The pressure to do something — to trade, to react — even when inaction would be the better choice.

The tendency to rely too heavily on the first piece of information encountered when making a decision — causing investors to fixate on arbitrary reference points like purchase price or 52-week high.

Daniel Kahneman

Even when investors try to adjust from an anchor, they typically do not move far enough — adjustment is systematically insufficient.

The tendency to rely disproportionately on the first piece of information encountered (the "anchor") when making subsequent judgments or estimates.

Daniel Kahneman

Placing excessive weight on the opinions of experts or famous investors — at the cost of independent thinking.

The tendency to judge the probability of an event based on how easily examples come to mind — causing recent, vivid, or emotionally resonant events to be perceived as more likely than they actually are.

Daniel Kahneman

The mental shortcut of judging probability by how easily an example comes to mind — overweighting vivid, recent, or emotionally charged events.

Daniel Kahneman

The tendency to underweight statistical base rates (the actual historical frequency of outcomes) in favour of specific, vivid case information.

Daniel Kahneman

An event that lies outside the realm of regular expectations, carries an extreme impact, and is rationalised in retrospect as if it should have been predictable — systematically underestimated by standard risk models.

Nassim Nicholas Taleb

The discomfort of holding contradictory beliefs — investors resolve it by ignoring evidence that challenges their thesis.

The tendency to search for, favour, and recall information that confirms pre-existing beliefs — while dismissing or underweighting evidence that contradicts them.

Daniel Kahneman

The deterioration in decision quality after making many decisions — leading to defaults, avoidance, or impulsiveness.

The systematic bias of selling winners too early (to lock in gains) and holding losers too long (to avoid realising losses) — the combined result of loss aversion and mental accounting.

Richard Thaler

We overvalue things we already own — investors demand more to sell a stock than they would pay to buy it fresh.

The anxiety of watching an investment rise without participating — a social and emotional pressure that drives investors into assets at precisely the wrong moment.

Richard Thaler

The same information presented differently leads to different decisions — a systematic bias in investor judgement.

The mistaken belief that independent random events are influenced by previous outcomes — expecting a "correction" after a streak of results in one direction.

Richard Thaler

The tendency to follow the crowd in investment decisions — buying what others are buying, selling what others are selling — to reduce the social risk of being wrong alone.

Richard Thaler

The tendency after an event has occurred to believe one "knew it all along" — creating a false sense of predictability that undermines learning from mistakes.

Daniel Kahneman

Believing that recent success will continue — pattern recognition applied where randomness actually dominates.

The tendency to believe one has more influence over events than is objectively possible — leading to overtrading and excessive confidence in active portfolio management.

Daniel Kahneman

More information leads to more confidence, not better decisions — increasing the risk of overconfidence.

A situation where individuals follow the observed actions of others rather than their own private information, causing a sequence of identical decisions regardless of individual evidence.

Richard Thaler

The tendency for the psychological pain of losing to feel approximately twice as powerful as the pleasure of an equivalent gain — causing investors to hold losers too long and sell winners too soon.

Daniel Kahneman

The tendency to treat money differently depending on its source, purpose, or label — creating irrational distinctions between units of currency that are economically identical.

Richard Thaler

The human tendency to construct coherent stories from random or loosely connected events — creating an illusion of understanding and predictability where little exists.

Daniel Kahneman

Judging a decision by its outcome rather than by the quality of the reasoning at the time it was made.

The systematic tendency to overestimate the accuracy of one's own analysis and the predictability of future outcomes — the single most consistently documented and costly bias in financial decision-making.

Daniel Kahneman

Markets overreact to dramatic events and underreact to gradual changes — creating systematic patterns to exploit.

The universal tendency to underestimate time, cost, and risk while overestimating the probability of success.

A prospective failure analysis technique: before making a decision, imagining that it has already failed and working backward to identify what caused the failure.

Daniel Kahneman

The distinction between decision process quality and outcome quality — only the former is controllable.

Kahneman and Tversky's model of how people actually evaluate gains and losses — showing that outcomes are evaluated relative to a reference point, and losses are weighted more heavily than equivalent gains.

Daniel Kahneman

The tendency to place excessive weight on recent experience when forming expectations about the future — extrapolating short trends into indefinite futures.

Richard Thaler

The statistical tendency for extreme values to move toward the average over time — often misinterpreted as causation or skill when it is purely statistical.

Daniel Kahneman

Judging probability by how closely something resembles a stereotype or prototype — ignoring base rates in favour of surface similarity.

Daniel Kahneman

Using others' behaviour as a cue for correct action — the mechanism behind market bubbles and panic selling.

The preference for the current state of affairs over change — manifesting as reluctance to make portfolio changes even when analysis clearly indicates they are warranted.

Richard Thaler

Continuing to commit resources to a failing course of action because of resources already invested, rather than assessing the future prospects independently.

Richard Thaler

The logical error of focusing on successful examples that passed a selection filter while ignoring the many failures that did not — systematically overestimating the probability of success.

Daniel Kahneman

Fast, automatic, intuitive mental processing — pattern recognition that operates largely below conscious awareness, prone to bias and heuristic shortcuts.

Daniel Kahneman

Slow, deliberate, effortful analytical reasoning — logical processing that can override System 1 impulses but is cognitively expensive and easily fatigued.

Daniel Kahneman